The Widening Gap between India’s Rich and Poor

According to a research paper by renowned economists Thomas Piketty and Lucas Chancel, income inequality in India is at its highest level since 1922.

What is income inequality?

Income inequality is the unequal distribution of household or individual income across the different participants in the economy.

What are the key findings of the paper?

The share of national income of the top 1% income earners is presently at its highest level since the creation of the Indian Income Tax Act in 1922.

The top 1% of earners acquired less than 21% of total income in the late 1930s. It dropped to before to 6% in the early 1980s. However at present it is 22%.

Over the 1951-1980 period, the bottom 50% group captured 28% of total growth and incomes of this group grew faster than the average,. While on the other hand, the income of the top 0.1% decreased.

Over the 1980-2014 periods, the situation got reversed as the top 0.1% of earners captured a higher share of total growth (12%) than the bottom 50% (11%)

During the same period, the top 1% received a higher share of total growth (29%) than the middle 40% (23%).

What are the causes of rising income inequality in India?

Though poverty declined but inequality increased in the post-reform period. The major reasons are:

Post reform period, increased GDP growth has come at the cost of ever-widening inequality. India’s opening up of the economy and liberalization was much in favour of the top income earners and capital owners.

Top Tax rates reduced: Tax progressivity was reduced progressively reduced. Top tax rates, which were very high in the 1970s (up to 98%), decreased to 30% in the 1980s and after.

3. Increasing wage inequality: Post-reform, privatization removed government set pay-scales which were less unequal. As a result, the wage inequality dispersion increased in many sectors.

Lower growth rates for low income group: Growth at the bottom of the distribution was significantly lower than average growth rates since the 1980s.

What are the major consequences of rising inequality?

High levels of inequality may cause redistributive pressures and lead to an unstable growth path.

May lead to social unrest

Leads to various illnesses due to inadequate public healthcare facilities

Environmental degradation

What measures have the Government taken up to reduce income inequality?

Land Reforms: Land reforms have been introduced to remove inequality in the ownership of land.